Relief from predatory debt settlement companies could be coming

We here at Walletpop have warned you before about the practices used by debt settlement companies and how to avoid being taken in by pie-in-the-sky promises of magically-erased debt. Now, finally, the law might be catching up. According to the Center for Responsible Lending, the FTC -- after a lengthy public comment period -- is considering implementing rules that would prohibit these operations from pocketing consumers' money without actually helping them get out of debt.

The FTC would technically invoke an already-on-the-books telemarketing law, which would apply to debt settlement companies due to the fact that phone contact generally takes place between the two parties, and the Center says it expects a final decision by the agency to come next month.

According to the Center's spokeswoman, Kathleen Day, "We think it would go a long way to curbing most of these scams."

The attorney generals of 41 states came together to declare their support of regulations that would prohibit upfront payments to debt settlement firms. In a letter sent last summer to the FTC, the National Association of Attorney Generals said, "...[T]he actions of debt relief companies have resulted in substantial increases in consumer complaints being filed with the States across the country."

Somewhat surprisingly for financial reform rules, the American Bankers Association also came out in favor of the FTC taking action.

Day told Walletpop in a phone interview (and this article confirms) that the debt settlement industry is proliferating, thanks to the recession that has put more Americans than ever into debt. "We're beginning to turn our attention, as are the regulators, into looking into companies that are preying on people who have been victimized by bad lending practices," she says.

The problem with debt settlement companies, as we've pointed out before, is that they take payments from customers -- sometimes for months -- before applying any of that money to the actual debts. In the meantime, consumers are harassed with collection calls, letters and even the threat of lawsuits from their creditors. Sending your payments to a debt settler instead of to the lender also makes penalties, fees and other expenses skyrocket, increasing your already-high debt even further.

The Center for Responsible Lending has an online overview of the debt settlement business and the enforcement being considered. In the meantime, keep this advice in mind if you're trying to get your debts erased, Day says. "Don't pay money up front, and don't stop making your payments and divert the money to someone promising to fix it for you, because all that does is increase your penalties."